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How to Create a Succession Plan for a Franchise Business

December 2, 2011
URL: http://www.entrepreneur.com/article/220734

When Glenn and Martha Dodd opened their Fastsigns franchise in 1994 in Houston, their goal was not to create a family legacy. They expected that their children, Helen and Philip, would chart their own courses in life. But as the kids grew up and began working in the store after school and in the summertime, it dawned on the Dodds that Fastsigns might be a viable career path for the whole family.

Ties that bind: Fastsigns' Glenn Dodd and his daughter, Helen Kutach
Ties that bind: Fastsigns' Glenn Dodd and his daughter, Helen Kutach.

"When we started, having a family business was not an objective," says Glenn, who eventually opened a second Fastsigns franchise. "We wanted to find something we enjoyed doing, and Fastsigns was a really nice fit. I won't say I was surprised when my children showed interest in the business. It just sort of evolved that way."

Sharing a business can do much to strengthen familial bonds. But passing a family business from one generation to the next can be a complicated process. For various reasons--fear of mortality, or the inability to let go of an enterprise that was years in the making--the original owners often fail to discuss with their families a plan for what should happen if they die, become ill or take an early retirement.

Leaving succession plans up in the air is an almost certain death sentence for a family business. According to the International Franchise Association (IFA), only 30 percent of family-owned franchises make it to a second generation. That's in part because, above and beyond any emotional issues related to succession, the franchisor has veto power and is the sole decider as to whether Junior is qualified to step in as boss.

"A few years ago this was a small issue," says William Slater Vincent, a Georgia-based attorney and professor at Life University who co-authored the IFA's handbook Franchise Succession Planning and Transfers. "But franchising has grown by leaps and bounds since 1980. Now we've got a full-force turnover going on, with so many people retiring or passing on. More and more children want to continue the family franchise."

Although the desire is often there, few franchisees take the appropriate steps to make successful generational transfers. "As far as any real succession planning, I'd be surprised if 10 percent of franchisees do anything beyond lip service," Vincent says. "With franchising, there's a problem on top of that fundamental problem. I've worked with franchisees from over 100 systems, and every single franchise agreement I've seen clearly states that if the franchise owner dies, the franchisor has to approve the successor."

While this may sound unfair, especially for franchisees who spend decades building equity in their businesses, the clause exists to protect the entire system. "Franchisors don't want just anybody taking over their franchises," Vincent says. "I don't know how many times a husband dies and his wife takes over the business even though she was never involved before. Instead of being a viable business, it becomes an asset sale. Franchisors don't want that."

Every franchise has different requirements for succession. Some franchises have an informal system wherein a local rep simply signs off on the transfer. Others don't seem to pay attention at all. Still others insist on asset and training requirements that are just as rigorous as the qualifications for new franchisees.

In the case of the Dodd family, the process was relatively painless. After working for much of their lives in their parents' Fastsigns stores and taking ownership classes, the Dodd kids easily qualified for an ownership transfer. In 2006, Glenn Dodd gave his son a 25 percent stake in one store and his daughter the same stake in the other; he then allowed each to buy up to 75 percent ownership of the operation--including a mandatory 12 percent stake in their sibling's store.

"The idea was to bind them together a little bit in terms of business planning and operations," Dodd explains. "It encourages cooperation. The business has brought us all closer together, and we all value each other's knowledge and experience."

A Different Story
Franchisee Brent Upchurch had a different experience altogether. Raised, as he says, "with ketchup in his veins," Upchurch watched his father run several McDonald's outlets in South Florida. After college and a stint in the Marine Corps, he decided he wanted in on the family business. His father, Roger, agreed, but warned that it wouldn't be an automatic handoff.

"My dad said, ‘There's no easy way to do this. You have to learn from the ground up,'" recalls Upchurch, who did start at the bottom, working all the positions at his father's restaurants for four years and eventually working for two more years as a manager. Only then did his father submit his name to McDonald's for ownership approval. After that, there were two more years of training and evaluations.

In 2008, Upchurch was finally given the thumbs-up to own a franchise, but he didn't get majority ownership in his first store until August 2011. "The onus is on you," he says. "McDonald's says, ‘Show me why you are an owner/operator.' It's your name on that lease you're going to sign for 20 years. You have to be willing to go the extra mile, to make McDonald's shine the way it should."

Upchurch's 11-year apprenticeship may seem extreme, but successful succession planning is often a 10- to 15-year process, according to Dana Telford, a consultant with Chicago-based Family Business Consulting Group. In fact, succession planning has become the cause du jour for franchisors, who have figured out that smooth transitions can allow them to focus on new units, instead of backtracking to fix or sell existing units where the handover process went awry.

"The best franchisors think through succession and how much control they have," Telford says. "Succession really does affect their business, and if that goes wrong it creates huge headaches."

Attorney Vincent agrees. "Quality franchisors will almost immediately start talking to you about your exit plan when you open your franchise," he explains. "They want to know who will take your place if something happens in the short term, and what will happen in the long term. They will begin that dialogue right away."

Seamless Succession
The key to a seamless succession is knowing exactly what the franchisor expects of the successor, then developing a plan to get the next generation ready to take over when the time comes. But getting to that point can be difficult.

"One of the biggest complexities is figuring out what mom and dad should say to the kids in the early days," Telford says. "In the entrepreneurial world, there are a lot of discussions in short bursts. Dad grabs the kids to help him clean the store and says, ‘This can all be yours someday; we can work together.' It's an emotional outburst without much forethought. What often happens is he's strapping the kids to the business with golden handcuffs, and that carries on into early adult life. That's probably not what he meant to do, but that's what the kids heard."

Instead, Telford suggests parents broach the subject with an open discussion when the kids are teenagers. "They should say, ‘Look, this is the life we've created, and you can get involved. It's our golden goose, and we like the golden eggs. We take it seriously, and if you guys want to get involved, we can talk about it as you get older,'" he says, noting the best-case scenario is that the children get an education, work outside the business, then come back once they've made an informed decision that the franchise is right for them.

Letting Go
Getting the kids onboard and enthusiastic about the business is one challenge. Another obstacle to succession is an owner who just can't let go. For many franchisees, putting the business they worked so hard to build into someone else's hands--even those of their own, well-trained offspring--is just too painful to contemplate. So, too often, they don't.

FastsignsOne way to make the transition easier is to slowly hand over responsibility to the next generation, rather than relinquishing it all in one fell swoop. "Our dad laid a good foundation with everything he's done," says Glenn Dodd's daughter, Helen Kutach, who points out that her father retains a 25 percent stake in the family's Fastsigns operation. "He gets all the credit for that. We're just prying his hands off the business finger by finger. Neither of us wanted to push him out before he was ready. This was his dream, and we still want him to have a great income but enjoy life a little more. We just want to do as good a job as he did."

Whether Dodd's Fastsigns business makes it to a third generation remains to be seen. "We plan on hanging on to it for a while, too," Kutach says. "Our kids might have to pry our hands off as well. I'd give them that option, but if it's not something they want to do, we won't force them. Our daughter is 8 years old and says she'd like to be a part of Fastsigns. Hopefully, it will be there for her if she wants it."

Get in Line
Putting a succession plan together is one of those things you should have done yesterday. Here are the steps to take now to make sure your hard work lasts long after you've left the business.

1. Get your house in order. There's no use in trying to pass along your franchise if you haven't handled your estate planning. In many cases, families are forced to sell a franchise simply to pay estate taxes--passing it on becomes a moot point. Consult a CPA to figure out what legal and tax vehicles make the most sense for your situation.

2. Put together a team. Passing on a franchise is easy if you have one child who has a passion for it. But what if you have multiple children, employees or other family members who want a piece of the pie? Working with family to set up the succession plan and bringing in the franchisor and legal experts can give you perspective and help you develop a plan that fulfills everyone's goals.

3. Create a successor profile. Determine exactly what skills and experience you want your successor to have. Additionally, make sure you know what qualifications the franchisor requires.

4. Identify your successor. Who is the best person to run your company? Look at the profile you created and compare it to the interested parties. Maybe your daughter, who has always been lukewarm about the business and refuses to attend additional training sessions, is outshined by a passionate employee, or your well-trained son doesn't have the organizational skills of his less-experienced brother.

5. Put them through the paces. Make sure your successors complete any training required by the franchisor. Then, make sure they know the business inside and out, and slowly hand them more responsibility. Even if you don't expect to leave the business for years, your successor should be able to step in temporarily if you get sick, sidelined--or have an urgent desire to spend a quiet year on the beach.